Tax and Budget Analysis

The Revenue Section of Counterbudget: 2000-2001 March 2000 

Revenue

• Previously Enacted Tax Cuts Scheduled to Take Effect in 2000, 2001 and Beyond
• The STAR Property Tax Relief Plan
• New multi-year tax cuts proposed in the 2000-2001 Executive Budget
• Phase Out of the Utility Gross Receipts Tax Over the Next Five Years
• Immediate Relief for Manufacturers From the Gross Receipts Tax
• Alternative Minimum Tax
• Corporate Disclosure Law
• Personal Income Tax
  

Previously Enacted Tax Cuts Scheduled to Take Effect in 2000, 2001 and Beyond

Background

Under the financial plan submitted with the 2000-01 Executive Budget, billions of dollars of accumulated cash surpluses will be used over the next several years to "protect" the overly ambitious tax cuts which the state has enacted in the last few years, but which are scheduled to take effect later this year or next year or the year after that.

Taken together, the tax cuts enacted in Governor Cuomo's last year in office and in Governor Pataki's first five years are reducing state revenues by $9.4 billion during the current fiscal year alone. As the Governor proudly points out, the total value of the tax cuts over the last six years has been about $29 billion - growing from about a half billion in 1994-95 to $4.2 billion in 1996-97 to this year's $9.4 billion. And under the laws now on the books, that price tag will continue to grow to $11.6 billion in 2000-01 and $13.3 billion in 2001-02.

The Governor defends his strategy for "protecting" the promised future tax cuts by saying these tax cuts are essential to the state's continued economic revitalization. But the $9.4 billion in tax cuts that have already been implemented have produced no tangible benefit for the state. Almost all of the state's job growth over the last several years has occurred in the New York City metropolitan area and has been overwhelmingly related to the good times currently being enjoyed by the financial services sector, professional business services, and entertainment and media.

The real test of the Pataki tax cuts is that they have done virtually nothing to stimulate growth in the parts of the state that are not benefiting from the strength of these industries.

Five billion in additional annual tax cuts are scheduled to take effect over the next 5 years. The tax cuts that are currently on the books will reduce state revenues by $11.6 billion during the state fiscal year that begins on April 1, 2000, and by more than $14 billion per year when fully implemented. This means that the Executive Budget that Governor Pataki recently submitted (and the budget that the State legislature is charged with adopting over the course of the next several months) had to accommodate $2.2 billion more in tax cuts than did the 1999-2000 budget.

Of the $2.2 billion in additional tax cuts to take effect during 2000, about $700 million is for the implementation of the third step of the STAR school property tax rebate program for owner-occupied dwellings, while almost $500 million is attributable to the full year cost of eliminating the state sales tax on the purchase of clothing items costing less than $110. The remainder of the $2.2 billion involves a virtually endless list of business tax breaks, many of which undercut the corporate tax reforms enacted in 1987. Some do this by weakening safeguards added by that law, like the Alternate Minimum Tax that ensures that profitable corporations can not use loopholes to reduce their tax liability by "too much." Others simply add new loopholes or preferences for particular industries or even for particular firms.

Governor's Proposal

Not surprisingly, the 2000-2001 Executive Budget, does not propose to repeal or reduce any of the tax cuts that are scheduled to take effect in either 2000 or during any of the subsequent years.

Recommendation

At the very least, the Governor and the Legislature should temporarily suspend those tax cuts that are currently on the books but which do not take effect until on or after April 1, 2001. They could leave these tax cuts on the books but eliminate their implementation dates pending a thorough review by a Blue Ribbon commission consisting of representatives of the executive and legislative branches as well as independent experts from outside of government.

This review should include an analysis of the overall fiscal and economic implications of the tax cuts implemented over the last six years and of those scheduled to take effect in the future. It should also include a review of the interaction of the increasing number of special economic development credits that have been established in recent years (and those that have been proposed in this year's Executive Budget) for businesses that are involved in particular types of economic activity and/or that locate in particular parts of the state. Many of these credits are being created for related purposes and with similar but not identical requirements. The result is that some firms, for the same activity, may be eligible for several different credits, all of which may have job creation as their goal, but with no or inconsistent accountability or reporting requirements.

The STAR Property Tax Relief Plan

Background

One of the troubling previous year tax cuts that the Governor insists on fully implementing is the STAR plan. In 1997, Governor Pataki got the message that by cutting the top rate on the state's progressive personal income tax, he was cutting the wrong tax, in the wrong way, at the wrong time. In his 1998 State of the State Address, he put a positive spin on this recognition of the fact that the income tax is a fair tax and that the overwhelming majority of New Yorkers do not feel oppressed by it: "Last year we knew it was time to build on the tax cuts of the first two years. From this podium, I told you that it was time to cut taxes again. Different taxes. Oppressive taxes. Property taxes." It is, however, unfortunate that this focus on oppressive taxes did not take center stage until after the state had cut the income tax by over $5 billion a year with only half of this amount, at most, staying in the New York economy.

While the Governor's STAR plan addresses an important need, it does so in an inefficient and ham-handed manner. By allocating property tax relief in a way that is unrelated to the amount of a household's property tax bill relative to its income, it delivers much less relief to those who are truly overburdened by property taxes than would a substantial expansion of the state's circuit breaker tax credit C at one-half the $2.7 billion fully implemented annual cost of the STAR program C and much more to homeowners for whom property taxes represent a very small percentage of their income.

Under STAR, the amount of tax relief to which a homeowner is entitled can vary with the median home value in his or her county of residence, but not with the magnitude of that household's property tax burden relative to its income. The plan's one income test (whether a senior homeowner's income is above or below $60,000 a year) creates an illogical notch effect, while begging the question of a rational sliding scale based on income. While the Governor reports that some people are being literally taxed out of their homes, his plan does not target its relief to such households. In addition, two taxpayers with the same income and the same size property tax bill could get widely varying levels of relief depending on where they happen to live.

The STAR plan is also flawed in that it provides relief only to homeowners. This ignores the fact that tenants as well pay property taxes. While homeowners pay property taxes directly, tenants, through their rental payments, carry a substantial portion (usually estimated as being more than one-half) of the property taxes paid by the owners of their buildings. But under STAR, neither tenants nor landlords receive any relief. Only the owners of owner-occupied dwellings are helped by STAR. STAR's only provision for renters is the circuit breaker for New Yorkers with annual incomes below $18,000. These tenants are allowed to count 25% of their rent as going toward property taxes.

Providing property tax relief only to those who own their own homes has an undesirable discriminatory effect, according to the 1990 Census. At that time, over 62% of white, non-Hispanic householders lived in owner-occupied dwellings, while the comparable figures for Hispanic householders was 16.5% and for black, non-Hispanic householders it was a little less than 27%.

Recommendation

To ensure fairness, property tax relief should not discriminate on the basis of geography or on the basis of whether someone is a renter or a homeowner. STAR fails on both of these counts. Enriching the state's real property tax circuit breaker credit would provide a more targeted, cost-effective means of providing property tax relief to those who are truly overburdened by the current system.

Expanding the circuit breaker would also eliminate the potential for unequal treatment since it provides relief to renters as well as homeowners. In an expanded circuit breaker for higher-income households, this percentage could be adjusted if appropriate.

New multi-year tax cuts proposed in the 2000-2001 Executive Budget

Background

Like the puppy who repeatedly bangs his head on the coffee table, Governor Pataki is proposing $722 million of additional tax cuts to solve a problem that the $9.4 billion of tax cuts was supposed to solve but did not.

Governor's Proposal

The 2000-2001 Executive Budget proposes a new round of multi-year tax cuts to be layered on top of the tax cuts that are already scheduled to take effect over the next several years. This new set of proposed tax cuts would also be backloaded - meaning that it's cost starts small but grows rapidly over time. According to the State Comptroller's recent analysis of the Executive Budget, the new proposed tax cuts would cost only $60 million in 2000-2001, but their cost would grow to $722 million when fully implemented.

Aside from the Gross Receipts Tax discussed below, most of the other tax cuts proposed in the Executive Budget involve efforts to use the tax code to encourage firms to create jobs in areas of New York State where job creation is needed and where it otherwise would not occur.

Recommendation

If these new tax cuts were really affordable, they could be implemented this year. But they can't be implemented this year without requiring unacceptable service reductions. No additional multi-year tax cuts should be enacted this year. At the very least, however, if there are new tax cut proposals that are worthy on policy grounds, they should be enacted in lieu of some of the tax cuts now on books not in addition to those tax cuts.

While the goal of job creation is obviously laudable, it ignores the experiences of this and other states with such efforts to use the tax code for "social engineering." The key lesson is that such provisions induce very little, if any, activity that would not have occurred otherwise, and simply provide other taxpayers' money to those who happen to meet the criteria involved.

None of these provisions should be enacted into law, particularly at this time when the state has not had any time to evaluate the effectiveness or ineffectiveness of the many similar provisions that have been enacted into law in the last several years. If serious consideration is given to any of these (or similar provisions), however, it is essential that certain basic "common sense" safeguards be included:

Tax credits created in the name of job creation should include accountability mechanisms to ensure that the promised job creation actually materializes. Only one of the Governor's proposals (a tax credit related to an expansion of the Power for Jobs program), however, includes any kind of even quasi-public reporting on the recipients' employment levels relative to what those levels had been prior to the receipt of the taxpayers' money.

Tax credits designed to help areas with poorly performing economies should have logical criteria and should not write into law criteria that make permanent some notion of what those underperforming areas may be at a particular point in time. Many of the Governor's proposals make just this mistake and do it in a particularly ham-handed way, making certain credits available everywhere outside the 12-county MTA region and nowhere within it. This would make tax breaks available for job creation in some areas with vibrant economies while excluding areas, such as the Bronx and Brooklyn, with extremely high unemployment rates and large concentrations of people living in poverty.

Tax credits or other government largesse should not be used to encourage or to reward the creation of jobs at or below the poverty level. Doing this only drives more money out of the federal, state and county treasuries in the form of the income supports that our society appropriately provides to the working poor. Only one of the Governor's proposed tax breaks has any job quality requirement, and that requirement is extremely inadequate - providing double-value tax breaks if an employer's average wages paid exceed $8 per hour.

Subsidies should not go to firms that violate environmental, worker safety, or other laws.

In the new information-based economy, investing in K-12 education; ESL, GED, and adult literacy programs; and, training for incumbent workers has greater pay-off than subsidies for low-wage jobs. Education must be protected from corporate welfare.

Subsidies don't create markets. Retail and service businesses that serve local markets should not be subsidized except in extreme cases.

Piracy is indefensible in all cases. Even those who feel that New York has to compete with other states, should oppose subsidies for intrastate and intra-region relocations.

Explanations of two of the specific tax cuts follow:

Phase Out of the Utility Gross Receipts Tax Over the Next Five Years

Governor's Proposal

Of the $722 million in new tax cuts being proposed in the 2000-01 Executive Budget, $517 million is for the Governor's proposal to eliminate the state's Gross Receipts Tax on the electric and gas utilities and to make those companies subject to the same corporate net income tax that applies to regular business corporations. The $517 million figure is the Governor's estimate of the difference between the taxes that the utilities would pay to the state treasury if current law were not changed (3.25% of their gross receipts) and the taxes that they would pay if the Governor's proposal were to be adopted and fully implemented (7.5% of net income.)

Recommendation Unlike the other tax cuts proposed in the Executive Budget, the elimination of the gross receipts tax on energy companies makes sense from a tax policy perspective. Since the utilities say that they pass this tax fully on to consumers, it represents a consumption tax and is regressive in nature, meaning that it is not related to the consumer's "ability to pay." For small marginally profitable businesses, particularly those in industries that involve high energy usage, a 3.25% decrease in utility bills could mean the difference between failing or succeeding.

1. The utilities, in their advertisements promoting the Governor's proposal, indicate that they will pass the full value of the elimination of the gross receipts tax on to consumers. The legislature should ensure that any bills that would enact the Governor's plan or a similar proposal into law, include language requiring the full "pass-along" of the savings to consumers, consistent with the utilities' advertisements.

2. While the elimination of the gross receipts tax on energy companies makes sense from a tax policy perspective, it should be done in lieu of tax cuts of equal value that are currently scheduled to take effect over the next several years (or some of the special corporate tax breaks that were implemented in the last several years) rather than in addition to those tax cuts, thus requiring even deeper service cuts or even greater deferred infrastructure investments in future years.

3. The Metropolitan Transportation Authority, which provides millions of low and moderate income workers in the New York City area with their only means of transportation to work, is funded in part by a special regional surcharge on the Gross Receipts Tax. It is essential that the MTA be protected from revenue losses as a result of the phase out of the Gross Receipts Tax, just as it was protected from revenue losses in 1997 when the Gross Receipts Tax was reduced from 4.25% to its current 3.25%.

Immediate Relief for Manufacturers From the Gross Receipts Tax

Governor's Proposal

While a 3.25% reduction in the cost of energy (assuming that all of the tax savings are passed on to consumers) will be a welcome break for all consumers, it will not automatically produce any of the economic benefits being attributed to it by the Governor who sees it as a tremendous boon to energy-intensive manufacturing firms. In fact, while the Executive Budget proposes a gradual phase-out of the tax for the utilities (and, therefore, for most consumers), it proposes an immediate program under which manufacturers would be provided with a rebate of the full amount of the gross receipts taxes included in their energy bills during the phase-out period.

Recommendation

To ensure that there are economic benefits to the state from such a rebate program during the phase-out period, it should only be available to firms that, at the very least, agree to maintain their current employment levels in the state.

While the elimination of the gross receipts tax on energy companies makes sense from a tax policy perspective, it should be done in lieu of tax cuts of equal value that are currently scheduled to take effect over the next several years (or some of the special corporate tax breaks that were implemented in the last several years) rather than in addition to those tax cuts, thus requiring even deeper service cuts or even greater deferred infrastructure investments in future years. It also essential that the MTA be protected from revenue losses as a result of the phase out of the Gross Receipts Tax, as it was in 1997 when one part of this tax was reduced from3.5% to2.5% in two steps.

Alternative Minimum Tax

Background

The state's annual Tax Expenditure Report shows that business corporations receive an estimated $1.6 billion in tax breaks each year. The current New York Alternative Minimum Tax (AMT) curbs the use of specific loopholes if their use cuts a corporation's franchise tax below a certain level, but does nothing to capture transfer pricing and other methods of manipulating net income reported. The federal minimum tax requires corporations to use the same financial accounting they use to report to their shareholders to calculate an alternative minimum tax.

As part of last year's budget adoption process, legislation was enacted that would reduce the AMT from 3% to 2.5% for tax years beginning after June 30, 2000

Governor's Proposal

The Pataki Administration has attempted to solve this "problem" by dropping many of the state's corporate loopholes from the state's annual accounting.

Recommendation

New York could reduce leakage from these tax preferences if it strengthened its Alternative Minimum Tax (AMT). If New York adopted the federal approach, it would improve the odds that a profitable corporation would pay at least some tax. New York should also repeal the 1994 change that allows corporations to carry net operating losses backward and forward in calculating the AMT, in the same way that they can in calculating their regular tax. This effectively allows firms to "income-average," an option for individuals that was severely restricted in 1984 and eliminated in 1986.

At the very least, the state should close some of the loopholes it added to the AMT in 1994, to ensure that no firm can use these preferences to reduce its tax liability by more than half. Last year's legislative provision to reduce the AMT from 3% to 2.5% should be repealed as part of the 2000-2001 budget adoption process.

Corporate Disclosure Law

Background

As discussed in the above section, New York has a great number of tax loopholes for corporations. The most comprehensive state record of these tax breaks is the Tax Expenditure Report, which shows an annual total of $1.6 billion. In addition, untold millions more are lost via transfer pricing and other techniques used by large, multi-national corporations to avoid paying their fair share of taxes.

Governor's Proposal

The Governor has no proposal this session to improve corporate disclosure.

Recommendation

New York State should enact a corporate tax disclosure law. Each corporation should be required to report their gross and net income, deductions and credits, and the amount of New York state taxes paid, much as they already do at the federal level. This would allow taxpayers and policy makers to identify companies in the state that may be making profits but, through the use of clever business structures and tax expenditures, are paying little or no New York taxes. Only with that information can the state truly know how well its tax policies are working.

Specific accountability measures could: Repeal the Investment Tax Credit ($163 million) Reduce the exclusion of subsidiary income ($100 million) Reduce the exclusion of investment income (140 million) Limit Industrial Development Agency's ability to abate state taxes ($60 million) Reduce abuse of point-of-service exceptions ($75 million) Recover subsidies from firms that do not live up to the conditions of tax abatements ($15 million) Eliminate last step of corporate surcharge reduction ($250 million)

Personal Income Tax

Background

Since the mid-1970's, New York State has cut its top PIT rate from 15.375 percent to 6.85 percent. Before the 1987 tax cuts, the state's top rate was 13.5 percent on investment income and 9.5 percent on wages, salaries and business income.

Governor's Proposal

The Governor has recommended no new changes to the PIT rate. Some of Pataki's proposed business tax changes, however, may result in different personal income taxes for owners of unincorporated businesses.

Recommendation

By restoring some of the progressitivity that was eliminated by the 1987 and 1995 tax cuts, approximately $1.7 billion could be generated for socially and economically productive investments in the state's human and physical infrastructure.

Over $400 million could be saved by simply reducing the amount of the tax cut that was given to taxpayers with incomes between $100,000 ($75,000 for singles) and $150,000 in 1997, and by eliminating that final tax cut for taxpayers with incomes above $150,000. This could be done by restoring the top tax rate on the portion of taxable income over $100,000 to the 1996 top rate of 7.125 percent from the 1997 level of 6.85 percent. Thus, a family earning $120,000 would still get the 1997 tax cut on its first $100,000 of taxable income but would pay at the 1996 rate on the portion of its income above $100,000.

An additional $1.3 billion could be generated by establishing an additional tax of 1 percent for the portion of all taxpayers' income above $150,000 and another 1 percent for the portions of income above $200,000. Even for this small portion of state taxpayers (approximately 3 percent), tax rates would still be well below what they were in 1987. For those with incomes between $150,000 and $200,000, the tax rate would be 7.85 percent compared to the 1987 rates of 9.5 percent on earned income and 13.5 percent on investment income. For those with incomes above $200,000, the tax rate would be 9.125 percent, still below the 1987 rates and below the current top rates in an increasing number of states.